Effect of Foreign Direct Investment and Stock Market Development on Economic Growth in Nigeria (1980-2009)

Abstract

This paper investigates the impact of Foreign Direct Investment (FDI) and stock market development on growth in Nigeria, for the period 1980-2009. The paper is imperative for policy makers to determine the trend of foreign direct investment and stock market development as well as the exert relationship that exists among foreign direct investment, stock market development and economic growth in Nigeria. The paper employs econometric techniques such as Unit Root test, Cointegration and Error Correction Mechanism. The results show that both foreign direct investment, its lagged and lagged stock market development have small, and a statistically significant effect on economic growth. The results seem to support the argument that extractive FDI and stock market development were growth enhancing. But the trends results show that both FDI and stock market development have cyclical movement. Finally, the results show that lagged exchange rate has positive effect on growth. These findings suggest that exchange rate appreciation enhance growth in Nigeria and there is need for more investment in these markets.

Keywords: FDI; Stock Market Development; Economic Growth; Error Correction Mechanism; Cointegration and Unit Root Test